[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



                                                   S. Hrg. 102-000 

   THE REBATE OF VALUE-ADDED TAXES AT THE BORDER AND THE COMPETITIVE 
                 DISADVANTAGE FOR US SMALL BUSINESSES

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                      WASHINGTON, DC, JULY 7, 2004

                               __________

                           Serial No. 108-70

                               __________

         Printed for the use of the Committee on Small Business


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
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                      COMMITTEE ON SMALL BUSINESS

                 DONALD A. MANZULLO, Illinois, Chairman

ROSCOE BARTLETT, Maryland, Vice      NYDIA VELAZQUEZ, New York
Chairman                             JUANITA MILLENDER-McDONALD,
SUE KELLY, New York                    California
STEVE CHABOT, Ohio                   TOM UDALL, New Mexico
PATRICK J. TOOMEY, Pennsylvania      ENI FALEOMAVAEGA, American Samoa
JIM DeMINT, South Carolina           DONNA CHRISTENSEN, Virgin Islands
SAM GRAVES, Missouri                 DANNY DAVIS, Illinois
EDWARD SCHROCK, Virginia             GRACE NAPOLITANO, California
TODD AKIN, Missouri                  ANIBAL ACEVEDO-VILA, Puerto Rico
SHELLEY MOORE CAPITO, West Virginia  ED CASE, Hawaii
BILL SHUSTER, Pennsylvania           MADELEINE BORDALLO, Guam
MARILYN MUSGRAVE, Colorado           DENISE MAJETTE, Georgia
TRENT FRANKS, Arizona                JIM MARSHALL, Georgia
JIM GERLACH, Pennsylvania            MICHAEL MICHAUD, Maine
JEB BRADLEY, New Hampshire           LINDA SANCHEZ, California
BOB BEAUPREZ, Colorado               BRAD MILLER, North Carolina
CHRIS CHOCOLA, Indiana               [VACANCY]
STEVE KING, Iowa                     [VACANCY]
THADDEUS McCOTTER, Michigan

                  J. Matthew Szymanski, Chief of Staff

          Phil Eskeland, Policy Director/Deputy Chief of Staff

                  Michael Day, Minority Staff Director

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                               Witnesses

                                                                   Page
Hufbauer, Mr. Gary Clyde, The Reginald Jones Senior Fellow at the 
  Institute for International Economics..........................     2
Barfield, Mr. Claude, Resident Scholar and Director of Science 
  and Technology Policy Studies, American Enterprise Institute...     4
Jones, Mr. William, Chairman, Cummins-Allison Corporation........     6
MacGuineas, Ms. Maya, Executive Director, Committee for a 
  Responsible Federal Budget.....................................     8

                                Appendix

Opening statements:
    Manzullo, Hon. Donald A......................................    22
    Velazquez, Hon. Nydia........................................    24
Prepared statements:
    Hufbauer, Mr. Gary Clyde, The Reginald Jones Senior Fellow at 
      the Institute for International Economics..................    28
    Barfield, Mr. Claude, Resident Scholar and Director of 
      Science and Technology Policy Studies, American Enterprise 
      Institute..................................................    31
    Jones, Mr. William, Chairman, Cummins-Allison Corporation....    41
    MacGuineas, Ms. Maya, Executive Director, Committee for a 
      Responsible Federal Budget.................................    47

                                 (iii)
      


 
   THE REBATE OF VALUE ADDED TAXES AT THE BORDER AND THE COMPETITIVE 
                 DISADVANTAGE FOR U.S. SMALL BUSINESSES

                              ----------                              


                        WEDNESDAY, JULY 7, 2004

                  House of Representatives,
                        Committee on Small Business
                                                   Washington, D.C.
    The Committee met, pursuant to call, at 2:05 p.m. in Room 
2360, Rayburn House Office Building, Hon. Pat Toomey, 
presiding.
    Present: Representatives Toomey, Bartlett, and Chocola. 

    Mr. Toomey. Good afternoon, everyone, and welcome to the 
Small Business Committee. The hearing today is on the topic of 
the rebate of value-added taxes at the border and the 
competitive disadvantage for U.S. small businesses.
    Today, the Committee will hold a hearing to examine the 
effect primarily on U.S. small businesses of international 
trade rules administered by the World Trade Organization that 
permit the rebate of value-added taxes at the border while 
denying comparable treatment for other types of taxes such as 
income taxes.
    European countries impose value-added taxes as high as 25 
percent, depending on the specific country. These taxes are 
imposed whether the goods are manufactured in Europe or 
imported from abroad. However, the VAT is rebated at the border 
when goods are exported from Europe.
    In contrast, current trade rules administered by the WTO do 
not properly recognize the ability to rebate other types of 
taxes, such as income taxes at the border. Because the United 
States does not impose value-added taxes, goods exported from 
the United States to Europe bear the full brunt of U.S. income 
taxes and the value-added taxes in Europe while goods exported 
from Europe to the United States enjoy a full rebate of VAT tax 
at the border.
    As Congress examines this apparent comparative 
disadvantage, this hearing will discuss various options to deal 
with the issue.
    We have got an excellent panel of experts with extensive 
experience to testify on the subject today:
    Dr. Gary Hufbauer, Professor of Economics at Georgetown and 
a Senior Fellow at the Institute for International Economics, 
has written extensively on U.S. international taxation. Claude 
Barfield, a Resident Scholar and Director of Science and 
Technology Policy Studies at the American Enterprise Institute 
similarly is well published on issues of trade. Bill Jones, 
Chairman of Cummins-Allison Corp, he will give us his 
perspective as a business negatively impacted from this 
practice. And lastly, we will hear from Maya MacGuineas--am I 
mispronouncing that?

    Ms. MacGuineas. MacGuineas.

    Mr. Toomey. MacGuineas, Executive Director of the Committee 
for a Responsible Federal Budget.
    I look forward to the testimony of all the witnesses. On 
behalf of the Committee, I wish to thank all of you for being 
here today, especially those who have had to travel far. I 
would be happy to yield to either of my colleagues if they 
would like to make an opening statement.
    If not, then I will introduce the first witness.
    Let me welcome Gary Hufbauer. Gary Hufbauer is the Reginald 
Jones Senior Fellow at the Institute for International 
Economics. Mr. Hufbauer is no stranger to this Committee having 
testified before the Committee just this last year on 
international tax issues. We welcome--
    [Pause.]

    Mr. Toomey. There we go, we are back. We do in fact want to 
hear what you have to say.
    We welcome you again before the Committee, and we look 
forward to your comments. We will go with five minutes for the 
statement from each witness. The clock, we have a light there 
that indicates that. I imagine everybody knows how that works. 
Orange is the one minute mark, is it not, and red means the 
time is up, and then we will proceed to questions.
    So at this point welcome, and I entertain the testimony 
from Mr. Hufbauer.

 STATEMENT OF GARY CLYDE HUFBAUER, INSTITUTE FOR INTERNATIONAL 
                           ECONOMICS


    Mr. Hufbauer. Well, thank you very much, Mr. Chairman. As 
you know, small business faces numerous disadvantages when 
selling abroad, and many of them or most of them can be traced 
to the substantial overhead costs of mastering a new 
environment.

    Mr. Toomey. Could you bring the microphone a little closer, 
please?

    Mr. Hufbauer. Sure. Is this better?
    So small business faces disadvantages when selling abroad, 
but it also faces larger firms generally competing in the 
United States, in the U.S. market, and they are able to spread 
their overhead cost. But in addition to that we have the tax 
issues, which you described, and the foreign competitors enjoy 
the benefit on their value-added tax and kindred taxes, such as 
the Canadian GST.
    The international rules, which are codified in the WTO, on 
border tax adjustments have a long history and they have 
attracted a lot of scholarly discourse, but just in brief, the 
rules work to the disadvantage of firms based in a country that 
does not use a VAT or GST as a source of public revenue, but 
instead relies on direct taxes--particularly social insurance 
and corporate income taxes, and of course, that is the United 
States.
    Now, over the past 40 years, governments worldwide have 
turned to VAT-type taxes to pay for public needs, particularly 
entitlement programs, and amongst OECD countries, VAT revenues 
typically amount to between four and eight percent of Gross 
Domestic Product.
    In economic theory, border adjustments for uniform 
businesses taxes are equivalent to exchange rate adjustments of 
approximately the same magnitude. So given that theoretical 
equivalence, the classic answer to national differences in 
business tax systems is that exchange rate adjustments will 
eventually offset any tax differences, such as the ones that 
you noted, Mr. Chairman, and wash away any permanent effect on 
business location, decisions or competitive disadvantage.
    So according to the classic logic, business firms in 
neither the exporting country nor the importing country should 
care where their business taxes are adjusted at the border. But 
there we have the theory. On the other hand, we have the 
practice, and the practice is they do care, and they care a 
lot.
    No country has imposed a VAT, or at least no country of any 
significance, without adjusting at the border. If they believe 
their classic theory, they would say, hey, the exchange rate 
will take care of it, no need to adjust. They do not believe 
it, and they have adjusted instead.
    Now, American firms as you know have complained about these 
adjustments since the early 1970s, and one reason, but not the 
only reason, is that border tax adjustments are immediate and 
certain. You know they are there. You get them. The exchange 
rate adjustments are distant and problematic.
    Research on fundamental forces that supposedly determine 
exchange rate, the research shows that they do an exceedingly 
poor job. You will not make money using fundamental forces to 
predict exchange rates. You would do better to flip a coin.
    So if fundamental forces cannot explain exchange ranges, 
then what confidence can you place in the classic prescription 
that any benefit on border adjustments will be offset by 
exchange rate changes? I suggest you cannot place much in that.
    My suggestion, if the Congress repeals the FSC, which it 
seems about to do, that it should pass yet another resolution 
calling upon the European Union and other WTO members to 
abolish their preferential border tax adjustments for indirect 
taxes. They should cease exempting these taxes when they export 
and cease imposing them on their imports.
    Now, I know that sounds pretty academic and pretty 
theoretical, but what I would suggest if a last call to the WTO 
members falls on deaf ears, the Congress should seriously 
consider for this and other reasons scrapping the corporate 
income tax in its entirety and replacing it with a business tax 
that can be adjusted at the border. U.S. firms can then enjoy 
tax parity with their foreign competitors, both at home and 
abroad.
    Thank you, Mr. Chairman.
    [Mr. Hufbauer's statement may be found in the appendix.]

    Mr. Toomey. Thank you very much, Mr. Hufbauer.
    Our second witness is Claude Barfield, Resident Scholar of 
the American Enterprise Institute. We look forward to drawing 
on your experience with international trade law. Welcome.

  STATEMENT OF CLAUDE BARFIELD, AMERICAN ENTERPRISE INSTITUTE


    Mr. Barfield. Thank you very much, Mr. Chairman.
    Because one of the other panelists, my colleague, Gary 
Hufbauer, is an acknowledged expert in the tax side, I am going 
to confine my testimony, at least my oral testimony, to the 
larger and the broader implications of a whole series of FSC 
decisions, ending with the decision that would allow you to 
invoke $4 billion worth of damages against the United States.
    I would like to point just to four issues, three problems, 
and then some suggestions for reform of the system.
    First, the question of national sovereignty versus the 
reach of WTO rules into domestic policy. And I should say as a 
footnote, I am a strong supporter of the WTO. You may not think 
so by the time I finish my testimony.
    The FSC/ETI decisions raise troubling questions about the 
reach of multilateral trading rules versus the right of 
national governments to determine fundamental tax policy. 
Because these decisions cannot be overturned short of a 
unanimous agreement by WTO member states, they also highlight a 
constitutional flaw in the WTO that is already operating in 
this and other cases to undermine its legitimacy; that is, the 
imbalance between the highly efficient and virtually unchecked 
dispute settlement system and the inefficient and practically 
unworkable consents of rule-making procedures.
    In the final appeals before the WTO appellate body in these 
cases, the Bush administration clearly recognized the gravity 
of the issue or issues raised by the earlier decisions, and 
starkly warned the appellate body of the consequences of an 
adverse ruling. In an unprecedented move, they sent not a 
career USTR lawyer, but the Deputy Secretary of the Treasury, 
Ken Dam, to the hearing.
    And Dam said the following: ``Few things are as central to 
a country's sovereignty as how it raises revenue. The necessary 
implications of the panel's analysis is that the WTO may second 
guess the reasonableness of a member's decision regarding the 
most basic elements of the tax system.''
    Now, in almost every aspect, I would argue the final 
judgment of the appellate body of the earlier panel reports 
despite protestations to the contrary ignored Dam's warning, 
and in my judgment, the Bush administration should have taken a 
much stronger stand, at least verbally, after the decisions, 
and even raised the question that the United States ought to be 
rethinking its relationship with the WTO. We can talk about 
that later.
    Secondly, the problem of the WTO as what I would call an 
incompetent world tax court, and here I am not going to go into 
details, but my point is that if you get into the details of 
the decisions you can see that the reasoning and the 
conclusions of both the panels and the appellate body--there 
were two panel decision and two appellate body decisions--
really were or at least showed a stunning ignorance of 
international tax law.
    And I point out in the final ETI ruling, the appellate body 
posited the necessity for clean, bright lines between domestic 
and foreign source income, ignoring the impossibility of finely 
tuning such divisions when attributing income from transactions 
related to R&D, manufacturing, marketing, advertising, and 
transportation.
    In the complex and shadowy world of international 
taxations, systems aim at avoiding double taxation inevitably 
allows some income to escape all taxation, and in most 
countries these fine lines are the subject of endless haggling 
between the government and its corporations.
    Thirdly, the WTO as avenger, this was the--the damages that 
were levied, the $4 billion, is being called by some 
international tax experts as outrageous, and I think that is 
true. Remember, the WTO is a reciprocity-based organization, or 
the rules, and thus it has been a standing practice since the 
early days of the GATT the retaliation for a breach of 
obligations should be limited to the trade effects of that 
breach. There are also WTO subsidy rules that have the 
obligation that retaliation be proportionate.
    In this case the United States argued, after it lost the 
case, that the damages should be no more than $1 billion for 
the subsidy effects, not even the trade--beyond even the trade 
effects. The EU argued, however, that the amount of the subsidy 
should be the amount of the worldwide subsidy, the worldwide 
effect, and astonishingly the arbitrators had bought this 
interpretation.
    They did so on the basis of what they called the 
``gravity'' of the breach and the nature of the upset of the 
balance of rights and obligations, ignoring the mandate for 
portionality. To reach this conclusion, the arbitrators invoked 
international law normally used for political and human rights 
violations, arguing that the U.S. breach represented an ergo 
omnes process. That is against all members and not against the 
EU.
    This decision went far beyond anything that had been 
negotiated or that had been present in the WTO.
    Finally, stepping back from the details of these cases, I 
would argue that what is needed is a major change in the 
mindset in intellectual isolation of the WTO dispute settlement 
system.
    In the FSC/ETI cases, both the panels and the appellate 
body demonstrated a stunning technocratic determination to 
barrel forward with their own pet legal theories and ignore the 
political history in the context of the issues at hand. I have 
suggested, not just for this case but in other forum because I 
think this case represents a kind of classic and extreme reach 
of what can happen when you go beyond the negotiated rules, I 
think this is happening in other areas, in anti-dumping, in 
safeguards, in environmental rules.
    There are two things I think we should consider in terms of 
the future of the WTO dispute settlement.
    One, and this is a legal term that they manage to invoke it 
sometimes, is ``non-liquet,` and that phrase is just a Latin 
phrase. It means ``it is not clear.''
    Given the widespread agreement that WTO tax are replete 
with lacunae and contradictory provisions, and given the 
questions concerning the legitimacy of judicial decisions are 
magnified at the international level, the panels and the 
appellate body should be instructed to use this doctrine more 
frequently and throw decisions back to the WTO general council 
or to trade--that is C-O-U-N-C-I-L, not counsel--or to trade 
round negotiations.
    The critics of non-liquet argue that it is prohibitive 
because international law is necessarily complete, or that is, 
the duty of judges to step in and fill gaps, and particularly 
in contentious areas. WTO rules by common consent are certainly 
not complete, and arguments for gap-filling by judges reflect a 
dangerous and even anti-democratic myopia.
    Alternately, you could have the invocation of a doctrine 
that we have used in the United States, the so-called political 
issues doctrine developed by the U.S. Supreme Court. The 
doctrine is meant to provide a means by which the judiciary can 
avoid decisions that have deeply divisive political 
ramifications and thus in the opinion of the court should be 
settled through judicial democratic processes involving both 
the legislature and the executive.
    In this case, it would involve trade negotiations, and not 
have the appellate body and the panels get out ahead of those 
negotiations.
    In summary, the proposition advanced here is that heading 
off corrosive conflicts between the United States, the EU, and 
other WTO members in the future will necessitate the forum of 
international trading rules that have now enmeshed and 
entrapped both trade superpowers.
    Thank you very much.
    [Mr. Barfield's statement may be found in the appendix.]

    Mr. Toomey. Thank you very much.
    Our next witness is Bill Jones, Chairman of Cummins-
Allison, located in Mount Prospect, Illinois. In addition to 
heading up a small manufacturing business, he also serves as 
the chairman of the United States Business and Industry 
Council.
    Mr. Jones, welcome.

    STATEMENT OF WILLIAM JONES, CUMMINS-ALLISON CORPORATION


    Mr. Jones. Also Cummins-Allison is an Indiana corporation 
founded by the Allison family, which you may be familiar, Mr. 
Chocola.
    But Mr. Chairman and Committee Members, my name is William 
Jones, and I am Chairman of Cummins-Allison, a privately held 
manufacture company based in Chicago. As you said, I also serve 
as the chairman of the United States Business and Industry 
Council this year, and I am a member of the National 
Association of Manufacturers.
    I appreciate the chance to be here today to talk with you 
about an issue that is extremely important to me, namely, the 
crisis in American manufacturing, and the way the rules of the 
game in international trade are stacked against American 
companies.
    The subject of this hearing, which is the disparity of the 
treatment of U.S. and foreign taxes in global trade, constitute 
a blatant example of how American manufacturers are currently 
disadvantaged and how policymakers must become more aggressive 
in the defending of U.S. interests.
    Cummins-Allison is one of the world's leading producers and 
innovators in the manufacture of equipment that scans, sorts, 
denominates, and authenticates currency for national security 
issues. This is an area that is quite literally essential to 
America's economic and national security, providing the 
critical function and deterrence of counterfeiting and the 
preservation of the dollars, the world's preeminent currency.
    Unfortunately, we, like so many manufacturers in this 
country, have been dramatically and negatively affected by an 
uneven playing field in the global trading system.
    Twenty years ago American companies accounted for 90 
percent of the U.S. requirements in the field of currency 
authentication. Today, that percentages is down to 30 percent, 
and we, Cummins, are the only surviving U.S. producer. This is 
a story that could be repeated for any number of American 
manufacturer industries and their workers.
    What is happening? You hear a lot of talk about cheap 
foreign labor and lower costs abroad, about the inability of an 
advanced economy to compete against low-cost developing world, 
but what we consistently fail to recognize is how much of our 
problem has nothing to do with the cost or the competitiveness 
or wage rates, and everything to do with the rules that 
literally make no sense and serve no readily apparent purpose 
other than to artificially punish U.S. manufacturers.
    No issue is more illustrative of that point or more 
important to the bottom line of American companies and workers 
than the one that the Committee is considering today. I do not 
come here as an expert on the legal niceties relating to the 
border adjustability of taxes, but I can tell you that I 
understand the fundamental business importance of this issue.
    The problem is as simple as it is unbelievable, and amounts 
to essentially the double taxation of U.S. producers selling 
abroad while our foreign competitors sell largely tax-free in 
this market. Let me illustrate.
    If our company, Cummins, or any other American company 
wants to sell a product in China or Europe where the value-
added taxes predominate, we get no refund or rebate of U.S. 
income taxes, but we do have to pay the foreign VAT. Meanwhile, 
foreign producers export to America get their domestic VAT 
rebated while picking up no income tax here.
    While there are complexities in calculating the exact 
effect of this practice, including issues relating to the 
effects of state sales tax in the United States, it has been 
estimated that this results in as much as a 25 percent 
difference in the price they can sell for here versus what we 
can sell for there.
    What is astonishing is that, as far as I can tell, the 
international rules that allow this to go on have no legitimate 
economic basis whatsoever. The rules are based on an artificial 
distinction between so-called direct taxes and indirect-like 
VAT taxes, even though economists have shown that these taxes 
tend to have the same incidence and effect. Allowing indirect 
but not direct taxes to be rebated on exports are imposed on 
imports makes no sense from a policy or economic standpoint, 
but I can tell you that it makes the task of keeping jobs and 
businesses in the United States far more difficult.
    How does something like this happen? Apparently this was 
just an obscure line squirreled away in the original agreement 
of the General Agreement on Tariffs and Trade, something that 
never made any sense in a situation where our negotiators just 
simply got out-foxed.
    For decades, Democrats and Republicans, Congress and 
administrations, and commentators and economists have all 
agreed that this rule is ridiculous. Every fast-track bill says 
we should make it a priority to fix it, and yet nothing is ever 
done.
    From a business standpoint, I have to implore you, stop the 
madness. We have lost 3 million manufacturing jobs, we have a 
trade deficit that is literally unprecedented in the history of 
the universe, and we have been the most important market in the 
world for many, many years.
    How is it that we do not seem to have the leverage to get 
the issue like this taken seriously? Of course, we do. We only 
have to be willing to use it and to play hardball the way our 
trading partners do so well and so effectively. The 
prescription is quite simple. We should make clear that we will 
not agree to any new multilateral trade agreements that does 
not fix this problem, and more, we should make clear to our key 
trading partners that we intend to see this accomplished in the 
short term, say the next year to 18 months. After that, we 
should make clear that we are willing to take more aggressive 
steps, including possible limitations on market access here 
until we see a resolution.
    The rest of the world has had more than five decades to 
reap the benefits of this absurd inequity. They have had their 
unfair advantage, and enough is enough. It is time to stand up 
for our manufacturers and change the rules.
    Thank you, Mr. Chairman.
    [Mr. Jones' statement may be found in the appendix.]

    Mr. Toomey. Thank you very much, Mr. Jones.
    Our concluding witness this afternoon is Maya MacGuineas, 
Executive Director of the Committee for Responsible Federal 
Budget. We welcome you before this Committee, and look forward 
to your comments.

   STATEMENT OF MAYA MACGUINEAS, COMMITTEE FOR A RESPONSIBLE 
                         FEDERAL BUDGET


    Ms. MacGuineas. Thank you. Good afternoon, Mr. Chairman, 
Members of the Committee. I should actually just clarify, I am 
not speaking as executive director of the Committee for a 
Responsible Federal Budget, but rather as a director of the 
Fiscal Policy Program at the New America Foundation.
    As you are all aware, it is the case that while European 
exporters benefit from rebates on their value-added taxes at 
the border, parallel tax relief for U.S. companies has been 
ruled illegal by the WTO. This is due to the distinction 
international trade law draws between the value-added taxes 
used by most nations and the corporate income tax that U.S. 
firms are subject to. Accordingly, the FSC/ETI benefits for 
U.S. companies appear to be on track to be repealed.
    There is considerable debate about whether border 
adjustments affect the competitive trading positions of 
nations. On the one hand, general economic theory holds that in 
a system of floating exchange rates, changes in tax levels are 
offset by changes in exchange rates. Under this line of 
thinking even for countries without floating exchange rates 
rebates are not believed to make differences in the long run.
    However, on the other hand, if this were true, it would not 
matter to our trading partners whether their VATs were rebated, 
yet it does matter and they are rebated.
    In the real world, exchange rate movements can be quite 
sticky, and not only are relative exchange rates affected by a 
variety of economic factors, the timing of exchanges can be 
quite unpredictable.
    So, as is often the case when it comes to theoretical 
reductions, we cannot know for sure whether the economic 
relationship between border adjustments and exchange rates 
holds true, nor can we know for sure the extent to which U.S. 
companies will actually be harmed by the WTO ruling. Either 
way, the current bill making its way through Congress is 
premised on the belief that U.S. companies will be severely 
disadvantaged by the change, and the bill therefore includes 
compensatory measures.
    It is true that the corporate tax bill does little to help 
small businesses in particular, which are less able to absorb 
general overhead cost, and do not benefit from the economies of 
scale that many of their larger competitors do. From the 
perspective of this Committee, that may well be problematic.
    Similarly, it is true that the benefits of the bill are 
spread quite unevenly with some sectors benefitting a good bit 
more than others. No matter the extent to which U.S. companies 
will be harmed by the tax law change, I would argue that the 
targeted tax relief, which is included in the FSC/ETI bill, is 
not the right approach to remedying the problem.
    Already the cost of the bill is quite expensive and it is 
likely to be more expensive than current projections since many 
of the expiring provisions would undoubtedly be renewed. Since 
the costs will increase budget deficits, thereby decreasing 
government saving, the effect could actually be to worsen our 
trade balance and harm small businesses.
    Furthermore, the general approach of targeted tax relief 
delevels the playing field between U.S. companies. Distorting 
the tax code to favor particular sectors of the economy may be 
politically appealing, but it is not good policy, nor does it 
help American consumers or the economy.
    And finally, while I will not mince words here, this bill 
has become an egregious example of how effective special 
interest lobbyists have become filling the package with 
expensive, unnecessary, and unjustified corporate handouts, and 
any pretence that this constitutes good tax policy was lost 
long ago.
    But out of the need to alter our tax policy does come an 
opportunity. The money saved from removing the illegal subsidy 
could be used to either reduce the deficit or help sweeten a 
comprehensive tax reform deal along the lines of what we saw in 
1986, which would include eliminating many existing loopholes 
and subsidies while lowering corporate income tax rates.
    Another desirable option would be to introduce a 
consumption tax, which could be adjusted at the border, to 
replace income taxes. Consumption taxes have a number of 
benefits, including, of course, that they would increase 
national saving. If we want to improve our trade balance, not 
to mention longer term economic performance, improving our 
national saving rate could play a critical role in this 
endeavor.
    At the same time, most consumption taxes, such as sales 
taxes, tend to be highly regressive whereas the existing income 
tax at both the corporate and individual level is quite 
progressive. However, it is quite possible to institute a 
progressive consumption tax that would maintain existing tax 
burdens or even make them more progressive, if desired, rather 
than shift the burden down the income scale.
    Since my time here is short today and I will not go into 
the details of how this might work, but a progressive 
consumption tax is desirable not just with regard to tax 
treatment and trade issues as we are discussing today, but in 
its ability to balance the oftentimes competing tensions 
between tax efficiency and tax equity.
    Thanks for allowing me to testify today.
    [Ms. MacGuineas' statement may be found in the appendix.]

    Mr. Toomey. Thank you very much for your testimony. I would 
like to thank all the witnesses for their testimony, and I 
would like to begin with some questions, and I suppose, in 
fact, starting with a comment which some of you may disagree 
with, and I would appreciate perhaps starting with Mr. 
Hufbauer, your reactions to this thought.
    It strikes me that there is a little bit of a irony in this 
whole discussion because the behavior that we are finding 
problematic, specifically the rebating by say European 
countries of the VAT when they choose to export their products, 
really amounts to European taxpayers subsidizing American 
consumers.
    What we are saying is we really do not like it when 
European taxpayers allow American consumers to buy things 
cheap, which strikes me as a bit ironic.
    For instance, if they instead of rebating the VAT, if they 
rebated twice the VAT or 10 times the VAT, and all European 
countries, for instance, did this, and they were all competing, 
American consumers would get things for free. That would be 
difficult for American manufacturers to compete with, 
obviously. But for American consumers, it would be an enormous 
windfall.
    Do you agree that this current system amounts to foreign 
taxpayers subsidizing American consumers?

    Mr. Hufbauer. Yes, it does, and I think there is always a 
balance between welcoming the subsidy to consumers and thinking 
about your production base, and that is what all these 
international rules are about, trying to strike that balance, 
recognizing that consumers are also producers and that over a 
period of time that, you know, earn what you buy as a household 
or as a nation.
    So your analysis is completely correct, and we have a 
number of laws in our trading system, and this area is one of 
them, where we say, well, you know, it might be great for 
consumers, but it is too hard on producers to have to compete 
essentially with the foreign treasury, which is what it comes 
down to, and that is going to be too detrimental to our 
productive apparatus over a period of time.
    I would say in this particular case the balance has been 
struck at the wrong place. We are too welcoming of these, as 
you say, subsidies to consumers.

    Mr. Toomey. Mr. Barfield, would you like to comment on 
that?

    Mr. Barfield. I fully agree with what Gary said, and my 
instincts would normally be with the producer, it is a question 
of balancing. I think this just goes too far in terms of 
helping producers in Europe or other countries--not just Europe 
since you have the potential of VAT and then the rebate all 
around--against U.S. manufacturers.
    I am normally skeptical if people talk about an uneven 
playing field, but I think in this case it is justified. The 
problem is that--I mean, we are not going to go in detail here, 
but if you look at the history, you know, the negotiators on 
both sides were aware of this, and it is very difficult to mesh 
the universal or the territorial system, and those who have a 
VAT, and those who have direct taxes, and that is why, you 
know, 20 years ago, 25 years ago there was a compromise. I 
mentioned this in my testimony. It was put together, and both 
sides would say--basically said--GATT panel said that both were 
wrong in terms of the way they were structured.
    So both the EU and the United States said, well, we will 
just agree to live and let live, and that is the balance that 
was upset here, I think, after 25 years, and in a way, as I try 
to argue, that I think the panels and the appellate body were 
really just over the--this was an issue they know very little 
about. Somehow they were determined to teach a lesson to the 
United States, and ignored the possibility or even going back 
to look at the political history here, and that is why we are 
in the mess that we are in, I think.

    Mr. Toomey. Thank you. This always just strikes me as a 
very peculiar debate that we engage in. It strikes me as 
irrational economic policy on the part of those countries that 
choose to subsidize exports instead of domestic consumption. I 
do not know why that is good for a given economy to engage in 
that, and yet they do. And then that manifests itself in lower 
prices for American consumers in this case, and we object 
strenuously to that, and for obvious reasons. There are some 
manufacturers that are hurt by that.
    I have a question for Mr. Jones, which is, it strikes me 
that one way to address this, and I think somebody referred to 
this in the testimony, I have always been one that believes 
that corporations do not pay taxes, they collect taxes, and 
corporate income taxes is counterproductive in many ways.
    If we abolished corporate income taxes altogether, does 
that not solve this problem, do you think its some of the 
problem? Does it solve a problem for your company?

    Mr. Jones. No, I would encourage you also to abolish the 
income tax and institute a VAT.
    One of the problems you have as a--

    Mr. Toomey. I am not necessarily advocating the institution 
of a VAT as a substitute, by the way.

    Mr. Jones. It would help us tremendously because the fact 
is I have to sell against manufacturers from other countries 
that have a cost of no government. I have tremendous fixed 
cost. And what happens, and I think strategic planning, 
particularly on the part of certain Asian countries, they 
understand I have to have a certain capacity to cover all of my 
fix cost. Labor is only seven percent of my total cost, okay? 
Now, my R&D is almost 20 cents on a sales dollar. Now my fixed 
overhead is very substantial.
    So if I can make all of my money in my home market like 
Japan at a much higher price, cover all of my total cost, I can 
sell in this market at a dumped price till the cows come home, 
and their strategy is to drive all of the U.S. production and 
get an industry out of business, which I have seen happen in 
many industries. And the consumer does pretty good in the short 
term, but when all of the U.S. industry is gone they then raise 
their prices.
    So there is two losers in the end when we let them follow 
this kind of a strategy to its end. First, we lose our own 
industrial base. Second, the treasury loses the revenue, and we 
wonder why we have a huge federal deficit. Well, as our 
manufacturing goes down the tubes, you do not collect income. I 
do not care how you are going to do it, through a VAT or an 
income tax or whatever. But the fact of the matter is 
manufacturers produce and create wealth. Farming, mining, and 
manufacturing, that is what creates wealth. And if we do not do 
things to help that, the consumer is going to have no job.
    I can tell you I talk to people that used to work for 
Motorola every week, and what has happened to that company 
through these unfair trade agreements, and the lost jobs and 
the lost income in Chicago, I spent several days with Mayor 
Dailey just a couple of weeks ago. He is beside himself. He 
does not know what he is going to do to fix the city's budget 
because the exodus of manufacturing, he says, his consumers 
cannot pay their taxes because the good jobs are going too. 
That is the reality.
    You have got to think about it in a global situation, 
understand that these other countries are trading for advantage 
to advance their manufacturing because they know it creates 
wealth. If you want to know what a country looks like that is 
just a service economy, that is China before they woke up and 
realized they wanted to be a manufacturer.

    Mr. Toomey. I may want to engage in continued discussion 
along these lines. I would come to some different conclusions 
than you have on a variety of these things.

    Mr. Jones. A practical world and I know who I have to 
compete with, and I--

    Mr. Toomey. I think comparing China to the United States in 
that way is an interesting comparison, but let me yield to the 
gentleman from Maryland for his questions.

    Mr. Bartlett. Thank you very much.
    I would like to continue a bit of discussion on the issue 
that Mr. Toomey raised about corporate taxes, and make the 
argument that corporate taxes are a very bad idea, that they 
are the most regressive tax that we have, that they hurt poor 
people in two ways:
    The first way that they hurt poor people is that they 
increase the cost of the products that poor people have to buy 
because, as Mr. Toomey says, businesses do not pay taxes. They 
collect them. Tax simply becomes a part of the cost of doing 
business and you add it to your cost, and you charge enough for 
your product so that you can pay the tax and still make a 
profit after the tax. And so poor people are now paying more 
for everything they buy because of corporate taxes, which is a 
very regressive tax. A rich guy can pay the increased cost. It 
does not hurt him. It hurts the poor guy.
    The second way that the poor guy is hurt by this is that it 
makes our businesses less competitive in the global 
marketplace, which is what we are here talking about today.

    Mr. Jones. Absolutely.

    Mr. Bartlett. And so the poor guy not only has to pay more 
for his product, and he does not even have a job now to get the 
money to buy the product because the job he would have had has 
now gone to the Pacific Rim or somewhere because of corporate 
taxes which among many other things has made our businesses in 
this country noncompetitive globally, and so it is gone.
    So why is not the best idea--and by the way when I talk to 
my liberal friends, they understand this for about five 
minutes, and then beyond that, they say, gee, those companies 
are rich, let us collect taxes from the companies. I have to 
come back and tell them, gee, you cannot collect taxes from a 
company. All the company does is collect the taxes from the 
people that sells its product to, or its service, because if 
they do not do that, they are going to be out of business.
    So why is it not the best solution to your problem just to 
do away with the corporate tax? Would not everybody be better 
off, you, and consumers, and everybody better off? And if the 
government needs more money, now, I think the government needs 
to cut its spending and stop doing unconstitutional things like 
philanthropy, like health care except for our military, like 
education, none of which, by the way, can you find any hint in 
Article 1, Section 8, are legitimate functions for the federal 
government.
    But if you really need more money, would it not be less 
regressive to get it simply by an increased income tax so that 
rich people now pay more of it?

    Mr. Jones. Who are you asking?

    Mr. Bartlett. Sir? Any of you, you know. But I just think 
that the corporate tax is a very bad idea for businesses. We 
have driven jobs overseas with it. We are making products cost 
more for our poor people, and why cannot we convince our 
liberals, who claim to love--by the way, I know they really 
love poor people because they make more of them so they have 
more to live, but why cannot we make that argument that 
corporate taxes are a bad idea?

    Ms. MacGuineas. Could I respond to that?

    Mr. Bartlett. Yes.

    Ms. MacGuineas. I would certainly agree with what both of 
you said, that corporations do not pay taxes, people pay taxes. 
I think it is not quite clear that the corporate tax is so 
regressive. In fact, generally I hear it is one of the more 
progressive taxes because it is passed along both in the form 
of lower wages, higher prices as you talked about, and also 
lower returns on capital. And I think the distribution or the 
incidence of that tax probably changes during the different 
business cycle where different parts of the market are tighter 
or are looser.
    But I agree with you that getting rid of the--I would agree 
with both of you that getting rid of the corporate income tax 
has a lot of benefits to it. One of them is that it is one of 
the least transparent taxes we have, and the world of bad 
budgeting, which is the world we live in right now. I think a 
lack of transparency on both sides of the budget is very 
problematic. You need to know the ways in which you pay taxes.
    However, I think you can eliminate the corporate income tax 
if you keep the individual income tax in place, because then 
you have what amounts--

    Mr. Bartlett. Wait, if you would hold just one moment. I am 
no fan of the corporate--of the personal income tax.

    Ms. MacGuineas. I had a feeling you would say--

    Mr. Bartlett. I would do away with that in a heartbeat and 
put in its place a consumption tax.

    Ms. MacGuineas. Right.

    Mr. Bartlett. So I think do away with the corporate tax, 
put in place a consumption tax. Now, this is clearly not 
regressive. You clearly are now helping poor people.

    Ms. MacGuineas. Well, and I think what I am suggesting when 
I talk about a progressive consumption tax or something like 
the Nunn-Dominici tax that was brought up about 10 years ago is 
that consumption taxes are desirable for so many reason. And if 
we could sort of come to an agreement that there is a role for 
them, particularly in this economy, and then hammer out the 
details of how progressive to make them, and I might want a 
more progressive tax. I probably would want more of a 
progressive tax than you would overall, but we could argue 
about how to structure the tax burdens. But create a corporate 
tax, not a wage tax, but a corporate tax to replace both the 
corporate income and individual income tax. I think that there 
is a compromise there to be had.

    Mr. Bartlett. Is not any corporate tax regressive?

    Ms. MacGuineas. Not--

    Mr. Bartlett. Because the consumer has to pay the tax. You 
just admitted that people pay taxes, corporations do not pay 
taxes.

    Ms. MacGuineas. Absolutely.

    Mr. Bartlett. Does not that make any corporate tax a 
regressive tax?

    Ms. MacGuineas. No. When it makes it progressive is when 
its shareholders who are paying the tax, capital owners who 
tend to be higher earners, and nobody knows for sure what the 
incidence of this tax is, but a lot of people believe that the 
corporate income tax is actually one of the more progressive 
taxes.

    Mr. Bartlett. I am having some trouble understanding that.

    Mr. Hufbauer. If I could, this is a very interesting 
debate, we could spend all afternoon on it. One of the vices, 
but it is also the great virtue of the corporate tax is that 
nobody knows, including economists who have spent their lives 
studying it, who actually pays it. So the non-transparency is 
kind of a legislative virtue because you can say the guy behind 
the tree pays it.
    The second point that I would make is that the system for 
reasons that congressmen know better than anybody else, the 
corporate tax is a mess. I mean, it is unbelievable. And 
everybody kind of agrees that we ought to get rid of it.
    I would not refer to the replacement tax--the government 
needs money--I do not refer to it as a consumption tax. It is a 
business tax, business pays it. When VAT is collected, the 
person who buys the good as an individual is not legally liable 
for paying that VAT.

    Mr. Bartlett. Sir, if you will excuse me for just a moment. 
When I talk about a consumption tax, I am not talking about 
VAT. I want taxes to be--I would like the tax to be in big, red 
numbers, bigger than the cost of the product, so when the 
American pays the tax he knows it. A VAT tax is hidden. I want 
that to be a consumption tax of something like 20 percent on 
everything you buy.
    Every time you buy it, I would like you to know how much 
your government is costing you.
    By the way, tomorrow is the first day this year you will be 
able to work to get any money for yourself. Today is cost of 
government day. You have worked all year so far to pay for the 
cost of government--

    Mr. Toomey. And on that note--

    Mr. Bartlett. --state and local taxes and unfunded federal 
mandate.

    Mr. Toomey. And on that note I will yield for a question to 
the gentleman from Indiana.

    Mr. Chocola. Thank you, Mr. Chairman.
    Just quickly, before I got here I was--I lived in Mr. 
Jones' world. I was CEO of a publicly traded company that about 
40 percent of our sales are outside the United States. We 
utilized the FSC and the ETI benefits. We have competed against 
companies importing here, they got VAT rebates.
    Would you argue that the VAT rebate is in effect exactly 
the same as a FSC/ETI benefits?

    Mr. Hufbauer. No. The FSC/ETI was very small. It was very 
modest.

    Mr. Chocola. But in effect the same?

    Mr. Hufbauer. Well, you could say very roughly 
qualitatively similar, but in terms of magnitude, always much 
smaller, and it only applied on the export side, not on the 
import side. There are many companies that would not take 
advantage of the FSC/ETI for--well, basically small business 
had a hard time taking advantage of it. Not all small business, 
but many did.

    Mr. Chocola. Has anybody filed a claim with the WTO against 
the VAT rebates?

    Mr. Hufbauer. Well, if you go back to the time that Claude 
was talking about, this was a major issue in the early 1970s, 
and U.S. Steel Corporation then did bring a case, and for a 
combination of what I would call political, the alliance issues 
of the day, and economic reasons, the treasury department 
rejected that case and the treasury department's holding, the 
decision was upheld by the Supreme Court, not on the economics 
of it, but on the grounds of the competent administrator.
    So yes, 30 years ago there was a very lively dispute in 
this country, and the United States went, for reasons that Mr. 
Jones thinks were quite misplaced, in the direction of 
accepting the rebate of the VAT.

    Mr. Chocola. Would it be your suggestion or recommendation 
that a claim be filed with WTO? And if so, what do you think 
the conclusion would be?

    Mr. Hufbauer. My suggestion, just to hog the microphone a 
little bit more, is that I would not pursue the litigation 
route because I think it is a loser given the ways the rules 
are now written. I am exactly with what Ms. MacGuineas and Mr. 
Jones have said.
    We need to change the rules, and we have to make it a 
priority to change the rules. And if we cannot change the 
rules, then I suggest with this reason and others we change our 
own system, because the corporate tax is, I think--words cannot 
express what I think about the corporate tax.

    Mr. Barfield. I would just like to add just on the trade 
side, I will defer to my colleagues on the intricacies of the 
tax side, it is also true, I think, that in the late seventies 
both the Europeans and the United States were told that the 
tax--this part of their tax system was GATT-illegal, and that 
is when they reached in 1981, what both sides at the time 
thought was a compromise. You will live and let live.
    So the FSC cases came fifth, and then the United States, 
because it thought that what it had was still probably too 
egregious a change to the FSC. Then you had 15 years where 
nothing happened, including the Uruguay Round. One could argue 
about whether or not you should have been more specific, but as 
I say in my testimony, the panels and the appellate body had 
this history before them. They knew this, and they blew right 
through it, determined to put their own stamp on it in a way 
that I think was really incompetent and clearly ignorant of 
international tax rules.
    Let me just go back and talk about the colloquy we have had 
for the last 10 or 15 minutes. You know, we have now--starting 
with the FSC and ETI decisions, we have now gotten into a 
debate about the U.S. tax system. That is a great debate to 
have, but the problem with it is to have that debate under the 
gun of the WTO and under the deadlines of retaliation means 
that you are not going to--you really are not going to have a 
good outcome.
    And the lesson here from me is, and I have a great deal of 
sympathy with Chairman Thomas and with the administration. I 
think the reason that they did not raise more hell than they 
did when the series of decisions came down or were not really 
more firm is that--my view, my view is that both the 
administration and Thomas thought that they could use the 
decision to effect reform in the United States. And that is a 
bad--without criticizing, that is a--clearly we are seeing how, 
as Ms. MacGuineas has pointed out, a bill that is a Christmas 
tree bill that has been done because it is under the gun of 
retaliation and timing.
    And so this judgment was, I think, a flawed judgment. And 
as a lesson for us not to think that you can just use a WTO 
decision and retaliation to somehow get a better economic 
policy. I think normally it is not going to happen because you 
cannot get over the particular interests, particularly in 
taxes.

    Mr. Toomey. I have got another question if we care to do 
another round. I would like to pursue just a couple of ideas.
    First, a question maybe either the economists could help us 
with this one, and I am one that thinks we do shoot ourselves 
in the foot with regard to our manufacturing in many ways--the 
level of taxes, the litigation that we tolerate, the regulation 
that we impose--we systematically put ourselves at a 
competitive disadvantage.
    Having said that, does anybody on the panel happen to know 
what the--where the total absolute value of American 
manufactured goods are today in relative terms to the past? 
What percentage? Are we at an all-time high? Are we at a many 
year low in terms of the dollar value, adjusted for inflation 
or not, of total manufactured output? Does anybody know?

    Mr. Hufbauer. Let me toss out a few figures. What has 
happened in manufacturing because of its very high productivity 
is that the labor force engaged in manufacturing has been on a 
very--

    Mr. Toomey. Right.

    Mr. Hufbauer. --long-term downward trend.

    Mr. Toomey. Right.

    Mr. Hufbauer. From about 30 percent in the early 1950s to 
about 15 percent today. However, the share of Gross Domestic 
Product accounted for by manufacturing has not fallen nearly by 
that percentage.

    Mr. Toomey. Right.

    Mr. Hufbauer. About 22 percent of Gross Domestic Product is 
now in the manufacturing sector. And if you do the arithmetic, 
you can see that manufacturing workers produce more than their 
pro rata share of the labor force, and that is down somewhat.
    We have a trade deficit, which has been alluded to, which 
is concentrated in the manufacturing sector, it is about $450 
billion in manufacturing. And if suddenly we had a trade 
balance, and there is a lot of macro economics that goes behind 
that, you would increase the share of manufacturing in GDP by 
about three or four percent. Now, something else would go down 
in GDP, but that is a very rough survey of some numbers.

    Mr. Toomey. That sounds--if I can just follow up because 
that is not exactly what I asked, and I understand and I agree 
with everything you have said. But given that the share of our 
total GDP has--that is comprised of manufacturing has declined 
somewhat, but of course total GDP has grown--

    Mr. Hufbauer. Oh, yes.

    Mr. Toomey. --is it true that we manufacture more today 
than we ever have before?

    Mr. Hufbauer. Oh, yes, yes.

    Mr. Barfield. Yes, yes.

    Mr. Toomey. So total American manufacturing output is at a 
record high?

    Mr. Barfield. In the nineties, and I do not have the 
numbers right in front of me, but if you just take the absolute 
amount for 1990 through 2002, we increased the volume and the 
amount by much more than our trading partners.

    Mr. Toomey. Right.

    Mr. Barfield. Major trading partners.

    Mr. Toomey. I just think that this is important because I 
think we often lose sight of the fact that we manufacture--our 
manufacturing today is at an all-time record high.
    Now, it is true that other sectors of our economy have 
grown more rapidly than manufacturing, and so it is not at a 
record high in terms of percentage of GDP, and the productivity 
gains have been much greater there than in other sectors, so as 
a percentage of labor force it has actually declined 
significantly, but we make more stuff than ever in that sense.
    The specific question that I had about this more narrow 
debate, my understanding is, Mr. Hufbauer, you are advocating 
one potential solution to this problem is to have the WTO 
change the rules so that it would ban the border VAT rebate. 
Mr. Barfield, do you agree that that is a viable solution?

    Mr. Barfield. I think it is going to be very tough for this 
reason. This is another downside of the new so-called judicial 
system we have got there. The European Union has one big--when 
you have won, they will turn to us and say, what are you 
talking about, change our system. We just won. It not that they 
might not, but it is going to be very difficult, and the price 
we would have to pay in a trade negotiation might be quite 
high.

    Mr. Toomey. So politically it is difficult.

    Mr. Barfield. I would not--I do not disagree with you. I 
think you should try to get--we should--you know, we should get 
this changed because it is--you know, it is an inequity that 
hits us, but I think it is going to be very difficult.

    Mr. Toomey. Do either of you have a comment about this?

    Ms. MacGuineas. I think I would prefer to revisit the 
distinctions that exist between direct and indirect taxes, 
which I do not think make a lot of sense in this environment. 
But I am probably also less concerned about this issue as a 
whole in some ways--back to your initial point, which is there 
are so many tensions in tax policy, but one of them is that of 
the producer interest versus the consumer interest, and we are 
in a situation where the consumer interests are doing pretty 
well, and I tend to think we end up with better overall 
economic policy if we look at things from the consumer 
perspective.
    So I am less concerned about those changes that are 
necessary to address this problem as much as the larger tax 
problems at hand.

    Mr. Toomey. Mr. Jones, do you have anything you wanted to 
add?

    Mr. Jones. Well, a couple of thoughts.
    You asked earlier about the--you mentioned your company 
exported. About 25 percent of what we product is exported, and 
the offset we would get from the FSC is not equivalent to the 
offset that the--I would love to be a German manufacturer or a 
Japanese manufacture, I guarantee you. I do not know what it 
would be, but I believe we would export more, significantly 
more if we had an equivalent offset.
    The second thing, in the WTO that always worries me is I do 
not know why we agreed to this, but WTO is one country, one 
vote, and you know, under the old system we had some leverage 
which reflects the size of our economy, and we certainly do not 
have one vote at the UN, we have a veto. And I do not know what 
you do about that, but it leads me back to what is practical it 
seems, it may be more practical for us to change our tax code 
which is, again, to eliminate the corporate income tax and have 
some kind of a consumption tax or a VAT. That is something we 
can do.
    I just do not have much hope that the WTO is going to give 
us any relief from what I have seen in their decisions. I think 
the Europeans, as you say, they have had some very significant 
victories in this area, and you are going to have a hard time 
there.

    Mr. Toomey. The gentleman from Indiana.

    Mr. Chocola. Just quickly following up on the--Mr. Jones, 
coming from a manufacturing background you are not gong to find 
a bigger fan of manufacturing or a bigger advocate, but also 
recognize realities of the global economy we live in, which 
provides a lot of opportunities, and I think we engage in a lot 
of hyperbole and a lot of rhetoric sometimes.
    I think it is important when we talk about trade issues 
that we keep in mind--as Mr. Toomey just said, we essentially 
make more widgets that we ever have, personal incomes are up. 
And so when we say there are no good jobs, I think we 
compromise the effort of focusing on the real problems, and I 
have always said when I was with a company that we would never 
move our business for low wages. We are not intending to 
compete on low wages. What we might move our business because 
of all the taxation, regulation, litigation that we had to deal 
with.
    Would you agree with that, that really if we only focus and 
talk about low wages we are really taking our eye off on the 
real problem, is the total cost of doing business?

    Mr. Jones. I have not said anything about--

    Mr. Chocola. No, I am not saying you specifically, but is 
this issue as discussed as I hear it in my district and around 
the country--

    Mr. Jones. I think this VAT inequity is a much bigger 
burden and a challenge for my company than the wage issue. I do 
not know if I am answering your question. I can only speak from 
my experience.

    Mr. Chocola. Well, I guess I am hoping to get some input as 
to how we can make sure that we focus on the real issues, which 
I think are things like this--fair trade policies and 
effective--

    Mr. Jones. Right.

    Mr. Chocola. --enforcement, and that is why I was asking 
about whether the impact or the effect is the same of the VAT 
rebate as the FSC/ETI; not the quantitative impact. Because if 
it is the same, then maybe we should try to enforce it more 
effectively with the WTO effort. But I am concerned that we get 
into the hyperbole which distracts from really focusing on the 
problems that face small businesses and manufacturers in 
America.

    Mr. Toomey. Well, I thank the gentleman from Indiana, and I 
thank the witnesses for testifying. Thanks for traveling here 
to be with us today. I really appreciate your input on this as 
my colleagues do, and the hearing is now adjourned.
    [Whereupon, at 3:00 p.m., the Committee was adjourned.]

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